IBBI lays down procedure for Resolution Plans -Third set of amendment in IRP-CP Regulations

By Shreya Routh (resolution@vinodkothari.com)

“Tough times do not define you, they rather refine you”- is perhaps the quote which the Insolvency and Bankruptcy Code, 2016 seeks to achieve. The Insolvency and Bankruptcy Code, 2016 (“Code”) tries to refine the tough times which the corporate debtor goes though during the corporate insolvency resolution process. With an objective of bringing more clarity in the process of resolution, IBBI has come out with yet another amendment in the form of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2018, (“Amended Regulations”).

Following major amendments have been brought:

  1. Report certifying constitution of the committee of creditors
  2. Notice and voting at the meeting of the committee of creditors
  3. Invitation of Resolution Plan and Request for Resolution Plan
  4. Withdrawal of the CIRP Applications
  5. Regulations with respect to class of creditors
  6. Regulations with respect to authorised representatives of resl-estate buyers

This write up deals with the points 1 to 3.

To read about the other topics covered under the Amendment Regulations, please refer to the article,” CIRP Amendment lays focus on Class of Creditors” by my colleague Ms. Megha Mittal. Read more

The Curious Case of Home-Buyers: All is Well?

By Sikha Bansal, (sikha@vinodkothari.com) (resolution@vinodkothari.com)


All the hullabaloo surrounding the inclusion of “home-buyers” in the category of financial creditors was put to rest by the promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“the Ordinance”). The Ordinance amends the definition of “financial debt” u/s 5 (8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) so as to include in clause (f):

“any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing

The Ministry of Corporate Affairs, in a statement released in respect of the Ordinance, stated:

“The Ordinance provides significant relief to home buyers by recognizing their status as financial creditors. This would give them due representation in the Committee of Creditors and make them an integral part of the decision making process. It will also enable home buyers to invoke Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 against errant developers.”

At the outset, it might be interesting to note that the amounts raised from the allottees, in every case, might not be classifiable as financial debts in substance. For instance, where allotment/contract is cancelled by the home-buyer and there is a claim of return of principal sum with interest, the NCLT in Pawan Dubey & Another v. M/s J. B. K Developers Private Limited held that such an amount cannot be claimed as a financial debt. The Ordinance makes no distinction for these cases and creates a “deeming” provision, by using the words “deemed to be an amount having the commercial effect of a borrowing”.

Is this happy ending? A pensive thought refuses accepting that all is well.

What about the priority?

Been accorded the status of “financial creditors”, the home-buyers will get a seat on the CoC. As such, they can exercise their voting rights to decide on resolution or liquidation of the entity.

However, being a financial creditor and being a secured one, are two different things. The Code, while introducing the differentia as to operational and financial creditors has retained the conventional classification of secured and unsecured creditors too. The same is evident from the definition of “financial debt” and “secured debt” and also priority enlisted under section 53 of the Code. As such, a financial creditor need not be a secured creditor.

While the Ordinance postulates home buyers as financial creditors, there has been no clarification as to such creditors being secured or unsecured. No changes have been made in section 53 to allot a specific priority to the home-buyers. As such, the monies of home-buyers will fall under clause (d), i.e. financial debts to unsecured creditors.

A secured creditor, irrespective of whether financial or operational, occupies second priority at par with workmen’s dues. However, financial debts owed to unsecured financial creditors rank after the dues of secured creditors, workmen, employees [for specified periods].

Therefore, the benevolent Ordinance seems to have performed the job partly. The home-buyers might still be left in a dry.

Home, Sweet home?

The entire exercise will very much depend upon whether the home-buyers are keener to get their flats ready or just get refund of their money. Say, if the objective of home-buyers is to get their flats ready, the recourse under the Code will not be of much help. The only feeble way in which they can ensure this is to utilize their voting rights to stall liquidation and get the corporate debtor in resolution mode, so that their flats can be completed and handed over to them.

On the other hand, if the objective of the home-buyers is to get their money back, as stated earlier, they do not seem to be at an advantageous position. The liquidation value ascribable to them would be very low in view of their sub-ordinated priority in the waterfall. As such, whether resolution or liquidation, there are fragile chances of home-buyers regaining their hard-earned money.

Why not RERA?

Section 18 read with section 19 (4) of the Real Estate (Regulation and Development) Act, 2016 already provides for refund of amount of allottees if the promoter fails to complete or is unable to give possession of the property. Several provisions of RERA stipulate adjudication of compensation and penalty for non-compliances by promoters.

In situations where the promoter fails to deliver the flats as well as refund the said amounts, and for some reasons also goes into insolvency before NCLT; there seems no benefit for the home-buyers to be a part of CoC, for reasons cited above. That is, in any case, the monies they would get would be limited to the extent of “liquidation value”.

Hence, the home-buyers are in no better situation, so far as return of their own money is concerned.

In search of a better deal . . .

For reasons as above, it seems that IBC is not a holistic shelter for the home-buyers.

Instead of awarding the status of financial creditor to the home-buyers, a better solution would have been to define the priority of home-buyers such that they could get their refunds alongside the dues of secured creditors and workmen.

There would have been another probable solution: RERA provides for maintaining a separate account for depositing the amounts realized for the real estate project from the allottees, from time to time, to cover the cost of construction and the land cost. Such a provision, in a manner, implies that the moneys so obtained by the promoters would be in the nature of money held in trust. Applying the analogy, if the money taken from home-buyers is accorded the status of “money held in trust”, the corpus will not be a part of the “assets” or “liquidation estate” of the promoter entity, and therefore would be out of the purview of section 53.

However, for the time being, the possible solution before home-buyers is either RERA or the amendment brought in by the Ordinance. The efficacy of this amendment will be pronounced only in times to come.

Overview of Insolvency and Bankruptcy (Amendment) Ordinance, 2018

By Sikha Bansal,(sikha@vinodkothari.com) (resolution@vinodkothari.com)


Post the Insolvency Law Committee’s Report recommending an overhaul in the Insolvency and Bankruptcy Code, 2016, the Government has passed the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, vide Notification dated 6th June, 2018, in an attempt to set things right. No doubt, IBC has triggered positive vibes in the lending market, yet being an evolving law, it has its own drawbacks.

The Ordinanceis the second ordinance in respect of this legislation; which, among several other amendments, seeks to provide first-aid for the burns given by the first ordinance passed 6 months ago in November, 2017 [later enacted as IBC (Amendment) Act, 2018, with modifications] in the form of section 29A. Read more

Financial Exposure of Secured Creditors and The relevance of vertical comparison in Resolution

By Richa Saraf (richa@vinodkothari.com)

Resolution process can be regarded as a mega- restructuring for which an insight into the ranking of claims of various creditors is pertinent. In most of the resolution plans, we can see that the financial creditors are paid a particular value as settlement of claims, and no specific provision exists as to how this amount is to be proportioned amongst various secured and unsecured creditors, or if there will be any priority at all. Most of us are of the understanding that any priority under Section 53 is available only in the case of liquidation, and law does not stipulate for any preferential treatment between the claims of secured and unsecured during resolution process, yet it is a well-established principle that while resolving an entity, the creditors of that entity shall not be put in a situation worse than what would have been in case the entity were to be liquidated (or else, there would be no point in resolving the entity). A comparison between a creditor’s entitlement in the resolution plan and in a hypothetical liquidation is referred to as “vertical comparison”.


Though there is no explicit provision calling for such vertical comparison, however, inference may be drawn from Section 6 of the UK Insolvency Act, 1986, which provides for challenge of decisions approving a voluntary arrangement on the ground that such voluntary arrangement has the effect of unfairly prejudicing the interests of a creditor, member or contributory of the company under Section 4A. The said rule was emphasised by David Richards J in Re T & N Ltd. [2004] EWHC 2361 (Ch), [2005] 2 BCLC 488[1]


“While I am wary of laying down in advance of a hearing on the merits of any scheme or CVA any particular rule, there is one element which can be mentioned at this stage. I find it very difficult to envisage a case where the court would sanction a scheme of arrangement, or not interfere with a CVA, which was an alternative to a winding up but which was likely to result in creditors, or some of them, receiving less than they would in a winding up of a the company, assuming that the return in a winding up would in reality be achieved and within an acceptable time-scale: see Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385.”


In Prudential Assurance Co Ltd v. PRG Powerhouse Ltd.  [2007] EWHC 1002 (Ch), [2007] Bus LR 1771[2], while deliberating on the fairness of a company voluntary arrangement (CVA), Etherton J. said-


“In broad terms, the cases show that unfairness may be assessed by a comparative analysis from a number of different angles. They include what I would describe as vertical and horizontal comparisons. Vertical comparison is with the position on winding up (or, in the case of individuals, bankruptcy). Horizontal comparison is with other creditors or classes of creditors.”


Also, in Mourant & Co Trustees Ltd v. Sixty UK Ltd (In Administration) [2010] EWHC 1890 (Ch)[3] while relying upon the views expressed in Re T & N Ltd (supra) and Powerhouse case (supra), the court stated as follows:


“(c) In assessing the question of unfairness, a number of techniques may be used, including what may be described as- vertical and horizontal comparisons. A vertical comparison is a comparison between the position that a creditor would occupy and the benefits it would enjoy in a hypothetical liquidation, as compared with its position under the CVA. The importance of this comparison is that it generally identifies the irreducible minimum below which the return in the CVA cannot go.”


Further, in the case of HMRC v. Portsmouth City Football Club[4], the court considered the validity of a CVA by examining whether it contravened the general principles of insolvency law by unfairly giving preferential treatment. Several parameters were laid down to regard a CVA as unfairly prejudicial:

  1. When considering whether or not any disadvantage resulting from the CVA is unfair, the court will consider both “vertical” and “horizontal” comparisons;
  2. When considering the results of a “vertical” comparison, if creditors in general, or a specific class of creditors, stand to receive less in the proposed CVA than they would have in liquidation, the CVA is likely to be regarded as unfair[5];
  3. In relation to any “horizontal” comparison, the fact that the creditors were treated differently in something which would call for close scrutiny, but any differential treatment does not automatically make the CVA unfair.[6]


The concepts of unfairness and prejudice are questions of fact. A court is extremely likely to find unfair prejudice and interfere in a CVA if it ‘fails’ the vertical comparison, i.e. if some creditors are to receive less in a CVA than they would on winding-up. It is, therefore, crucial that the company can demonstrate that the CVA will deliver a better result for creditors than a winding up to ensure the vertical comparison is ‘passed’.


Similar provisions also exist in the insolvency laws of US. Section 1129 (a) of Chapter 11 of the US Code lists down the minimum requirements which the reorganisation plan shall meet in order to be confirmed, one such requirement is-


“(7)With respect to each impaired class of claims or interests-

(A) each holder of a claim or interest of such class-

(i) has accepted the plan; or

(ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date.”


It is, thus, not possible to use a CVA (or for that matter, Resolution Plan) to modify any rights or to alter the priority of payment of a charge holder, by unilaterally modifying any of the contractual provisions. It is unreasonable and unfair in principle to treat the secured creditors pari passu with unsecured creditors. Secured claims rank ahead of unsecured claims and the status should be maintained even in the event of insolvency, as regards the application of the proceeds of realisation of the assets, subject to certain preferred expenses i.e. resolution process costs.

[1] http://www.bailii.org/ew/cases/EWHC/Ch/2004/2361.html

[2] http://www.bailii.org/ew/cases/EWHC/Ch/2007/1002.html

[3] http://www.bailii.org/ew/cases/EWHC/Ch/2010/1890.html

[4] [2010] EWHC 2013 (Ch); [2011] BCC 149

[5] Re: T&N Ltd. [2004] EWHC 2361 (Ch)

[6] Practical Company Law and Corporate Transactions by Mark Stamp